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2006 industry report: banking

Urge to merge could surge among smaller N.C. banks

Bank notes

TREND: Expansion. Big banks have revved up the merger machines again. The state had a bumper crop of startups in 2004, but the pace has slowed since.

OUTLOOK: Bigger deals possible in 2006. Expect smaller Tar Heel banks to merge with each other to bulk up.

After yawning their way through the first half of 2005, the state’s three biggest banks got busy buying in the second half. Even Winston-Salem-based BB&T — which had sworn off mergers in 2004 after struggling with two earlier purchases — got back in the game, pulling the trigger in December on a $623 million deal for Atlanta-based Main Street Banks, which should close in the second quarter. And BB&T isn’t done. It wants to grow assets through acquisition by about $5 billion this year. Main Street’s $2.5 billion gets it just halfway. “We’re still looking, and we’d like to do additional deals but at a measured pace,” says Burney Warren, executive vice president for mergers and acquisitions.

The two biggest Tar Heel banks, Wachovia and Bank of America, both based in Charlotte, spent much of 2005 consolidating earlier acquisitions. Wachovia, the second-largest, took all year to integrate Birmingham, Ala.-based SouthTrust, which it bought for $14.3 billion in 2004, but still found time for a few deals late in the year. In September, Wachovia said it would buy Irvine, Calif.-based Westcorp for $3.9 billion, giving it a large auto-loan originator that has 19 California branches. Within two weeks, it bought the international banking business of San Francisco-based UnionBanCal for $245 million and San Diego-based mortgage originator AmNet Mortgage for $83 million.

Bank of America, the largest bank in the state, took a break after its $47 billion purchase of FleetBoston Financial in early 2004 but struck a $35 billion deal in June to buy Wilmington, Del.-based MBNA, one of the nation’s largest credit-card issuers. MBNA held about $30 billion in deposits, potentially enough to tip BofA over a federal limit that bars banks from getting more than 10% of U.S. deposits by acquisition. BofA shed deposits to stay below the cap and closed the deal in early January. Domestically, BofA likely will try to add banking and financial services without adding deposits, but it’s shopping overseas. In September, it bought 9% of China Construction Bank, plus a five-year option to increase its stake to 19.9%, for $3 billion.

“We will see a fairly significant number of mergers and acquisitions in North Carolina, but among our own banks,” says Harry Davis, professor of finance at Appalachian State University and economist for the North Carolina Bankers Association. A large number of new banks over the past few years — a record 12 were chartered in 2004 — may signal a wave of consolidation as community banks, usually those with less than $1 billion in assets, look for ways to gain economies of scale.

Banks of every size are profit-ing from a combination of factors. Loan demand is high, interest-rate spreads are favorable, and problem loans are scarce. Earnings are expected to remain healthy in 2006. Long-term rates are expected to edge up, which may not be good for consumers but should help bank margins.

State Banks Commissioner Joseph A. Smith Jr. says most new banks will follow a similar growth pattern: Within three years, they will have turned a modest profit and will have amassed around $100 million in assets. Failure is unlikely. Despite the loss of tens of thousands of manufacturing jobs, the state hasn’t had a bank failure in more than 10 years. “It’s stunning how well the banks weathered it,” Smith says. “So far, it has been silly to bet against them.”

Despite all the startups, deposits are still concentrated in a few banks. The seven largest account for 84% of Tar Heel deposits, about the same share as five years ago. But Smith says small banks are stealing business from big banks by pitching more personal service. “Deposit concentration has not resulted in a lack of competition. There is still intense competition.”

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